Even as a new wave of litigation challenges the use of retail class mutual funds, a new study finds a shift toward less expensive share classes.
“Amid a persisting trend toward lower cost and more transparent share classes, as well as the recent Department of Labor (DOL) Conflict of Interest Rule, the R6 share, which typically has no revenue sharing (e.g., 12b-1 fee, sub-TA fee), has witnessed significant asset growth,” according to the latest issue of The Cerulli Edge U.S. Monthly Product Trends Edition. Not surprisingly, Cerulli notes that “the low-cost and transparent attributes of the share class resonate with DC plan sponsors to the point that 64% of asset managers view large DC plans as the most popular channel for the R6-share class.”
In addition to demand from intermediaries for the lowest priced share class, Cerulli cites a number of trends leading to a greater focus on the lower-cost fund classes, including:
- plan sponsors’ efforts to offer lower costs;
- the DOL’s conflict-of-interest rule; and
- the SEC’s recent 2016 share class initiative.
The report notes that firms expect to see the biggest increase in use of I-shares, R6-shares, and/or a platform/wrap share class — 64%, 55%, and 50%, respectively. Moreover, financial advisers report that although 23% of their 2015 practice sales came in A-shares, they expect to substantially increase their use of platform and institutional share classes this year and beyond.
The report cites Morningstar data indicating that institutional share classes represented 31% of assets at the end of 2Q 2016, up from 16% in 2006. On the other hand, A-shares made up just 16% of assets at the end of 2Q 2016, about half the level (28%) in 2006. Cerulli notes that institutional and retirement share classes brought in positive net flows in June 2015 and June 2016 — $143.5 billion and $125.1 billion, respectively, while A-shares had outflows of $91.3 billion and $68.9 billion over the same periods.
Cerulli continues to believe that core share classes will win out, specifically a lean institutional share class, a non-12b-1 share class for platforms and wraps, a classic 25-basis-point share class, and a bare-bones retirement share class exclusive of a servicing fee (sub-accounting transfer agency fee).
